Snap's Q4 results show uncertainty ahead for its business despite growth

Snap has released its financial results for the quarter and full year ending on December 31, 2022. The company reported an increase in Daily Active Users (DAUs) to 375 million and a 12% growth in annual revenue to US$4.6 billion.  

However, the company also reported a net loss to the tune of US$1,430 million in 2022, compared to a net loss of US$488 million in 2021. 

While Snap's chief executive officer Evan Spiegel boasted about the company's "positive full-year Free Cash Flow" and "driving improved return on investment for advertisers," the reality is that the company has struggled with significant challenges.  

Despite the reported growth in DAUs and revenue, the company has seen a decline in its adjusted EBITDA and free cash flow in the fourth quarter of 2022 compared to the previous year. 

Snap is also not providing its expectations for the first quarter of 2023 due to uncertainties related to the operating environment, raising questions about its ability to sustain growth.  

The company's subscription service Snapchat+, aimed at taking on TikTok while reaching over two million paying subscribers, may not be enough to offset the challenges faced by the company. Snap also kept the specific viewership numbers for Snapchat+ confidential. 

The reported growth in total time spent watching Spotlight content is a positive for Snap, but it remains to be seen if this will translate into real, sustained growth for the company.  

"2022 was a challenging year for our business, as we continued to be impacted by macroeconomic headwinds, platform policy changes, and increased competition," said Speigel in the earnings call. 

"We have taken action to refocus our investments to support our three strategic priorities of growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth, and investing in the future of augmented reality. In addition, we focus on the most important inputs we can control: delivering engaging experiences to Snapchatters and improving business outcomes for our advertising partners." 

Snapchat's performance will continue to be closely watched, with the company's upcoming Investor Day on February 16 expected to provide further insights into its plans. 

What the results mean for the broader ad market

Insider Intelligence principal analyst Jasmine Enberg said Snap is a canary in the coal mine, and its Q4 earnings paint an unsettling picture of the state of the social ad market.  

She noted advertisers continued to pull back social ad spending into Q4 as economic challenges persisted, and the social platforms continued to reel from Apple's privacy changes. Nevertheless, she said investors should prepare for a new normal in social advertising, defined by much more modest growth." 

"Snap's strong association with augmented reality has made navigating last year's headwinds difficult. Snapchat users love it, but advertisers don't understand it, and with fewer ad dollars to go around, they've been less willing to experiment on the platform. In addition, Snap's emphasis on more-private sharing has also made it a confusing platform for advertisers, as social media moved more towards short video and public-facing content last year," said Enberg. 

"Snap's secret weapon is its audience. Snapchat users are a built-in research and development tool for Snap's long-term AR ambitions. Despite the intensifying competition, Snapchat has managed to retain and grow its user base every quarter of 2022. Most of that growth, however, is coming from the rest of the world, which monetizes at a lower rate, and that hampered Snap's overall ad revenue growth last year." 

Snap Inc. shares plummeted more than 20% on NYSE after the company reported its slowest-ever quarter for revenue growth since going public in 2017.